Each week, aprofessional investor tells us where she'd put her money. This week:Lucy Macdonald, Brunner Investment Trust.
Forecasting political outcomes has never been a particularly fruitful pastime for a long-term investor. The political surprises of the last year, together with unforeseen events in currency and commodity markets, led to increased volatility for stockmarkets. However, these periods of volatility have not lasted long and equity prices have risen in between times.
In particular, the markets weathered the EU referendum result and ended with a Trump-inspired rally amid hopes of tax cuts and a more pro-growth policy. As we progress through 2017, further elections in Europe should keep the volatility coming. Central-bank policy also has the power to surprise as the US Federal Reserve continues on its path of tightening. Last, but by no means least, the new US administration still possesses plenty of ability to shock.
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Market returns this year are likely to be more moderate than 2016 as starting valuations are higher, particularly in the US, and monetary stimulus will fade. Set against these restraining factors are the positives of improving earnings momentum, particularly from financials, technology and the energy sectors, as well as the favourable liquidity environment.
So how to navigate this minefield of unforecastable events? The answer is to keep focused on what can be controlled: the search for good stock ideas and the management of risk in the portfolio. The following stocks were two of the best contributors to the positive performance of the Brunner Investment Trust last year.
US-based UnitedHealth (NYSE: UNH) uses its economies of scale to provide comprehensive healthcare coverage to a broad selection of individuals and corporate plans through managed care, pharmacy-benefits management and technological innovation. It is conservatively managed and earnings have consistently beaten expectations.
The company's third-quarter 2016 results were better than forecast and the firm raised its expectations for 2017 after several years of stellar performance and the prospects of significant changes to US public healthcare policy. I expect continued consistent revenue growth and operating margin expansion as a result of strong performance in both health benefits and Optum, the company's health-services platform.
Covestro (Frankfurt: 1COV) is a high-tech polymer supplier serving a broadly diversified range of markets, including the automotive industry, construction, electronics and furniture. We first invested at the company's initial public offering in 2015, when we saw that there was much to like about the firm: improving pricing, volume growth, cost and market leadership, balanced regional exposure, spare capacity in key products and reduced capital expenditures. One of the initial attractions of Covestro was its ability to generate returns above its cost of capital and that strength continues to justify its place in the portfolio.
Lucy Macdonald is co-manager of the Brunner Investment Trust.
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